In the field of high-end chip manufacturing equipment, there is a company that cannot be bypassed, and that is the Netherlands' asml holding. $ASML Holding (ASML.US)$ This company monopolizes the supply of global EUV lithography machines, thus becoming the pearl on the crown of the entire semiconductor manufacturing equipment industry.

Thanks to the rapid development of the chip industry and the company's own industry position, asml holding's stock price has increased more than tenfold in the past decade, far exceeding the less than two-fold increase of the S&P 500 index during the same period.

The secret to asml holding's past success can be found in its financial reports. On October 16, asml holding will release its latest financial report. Each time the company releases its financial report, it may also represent a good trading or investment opportunity. Before that, investors need to figure out how to understand its financial reports.

So how should we analyze asml holding's financial reports? We can focus on its financial growth, moat, cash flow, and shareholder returns.

1. Financial growth

As a chip supplier, asml holding's financial reports are closely related to the development of the chip industry, which has both cyclical characteristics and long-term growth potential. Therefore, from the perspective of financial growth, asml holding can be said to be both a growth and a cyclical stock.

The growth of ASML Holding is mainly reflected in the continuous increase in revenue. ASML Holding's revenue increased from 5.25 billion euros in 2013 to 27.56 billion euros in 2023, a growth of about 4.2 times over ten years, with a compound annual growth rate of approximately 18% during this period. Moreover, revenue has grown every year during this period without exception.

The cyclical nature of ASML Holding is reflected in the changes in revenue growth rate and the fluctuation of net income. Looking at the revenue growth rate, during industry booms, ASML Holding's revenue usually shows an accelerated growth state; conversely, during industry downturns, its revenue growth rate tends to decline.

For example, from 2020 to 2021, the chip industry benefited from the impact of the online office demand brought about by the epidemic, accelerating its expansion. ASML Holding's revenue also grew significantly faster. By 2022, after the accumulation of chip industry inventory, the revenue growth rate of ASML Holding also declined significantly. By 2023, as the chip industry began to rebound, ASML Holding's revenue growth rate also rebounded.

The cyclical nature of ASML Holding is more evident in the fluctuation of net income. In the high-boom year of 2021, ASML Holding's net income growth rate exceeded 60%; however, by the downturn period in 2022, its net income directly decreased by 4.4% year-on-year.

Therefore, we can observe the changes in revenue growth rate in ASML Holding's latest financial report. If the growth rate continues to rise, the industry may be in a boom cycle, which may also be conducive to its stock price performance. Conversely, it may bring pressure on the stock price.

However, since ASML Holding is at the top of the chip industry chain, the outbreak of downstream demand will have a certain lag in transmitting to ASML Holding's revenue growth. For example, when most chip design companies experience revenue growth, ASML Holding's revenue in 2024 Q1-Q2 performance both showed a year-on-year decline, resulting in a sharp short-term drop in the stock price.

Therefore, we may need to combine the downstream demand situation to further assist in determining the direction of revenue growth. Inventory turnover rate is an important indicator for judging downstream demand. For instance, when the inventory turnover rate of chip design companies like NVIDIA starts to rise significantly, it may indicate a strong demand cycle, which could be a positive signal for revenue growth of upstream equipment suppliers like ASML Holding. Conversely, when the inventory turnover rate of companies like NVIDIA changes from rising to falling, it may also imply a sustained downturn inflection point for ASML Holding's performance growth rate.

2. moat

The long-term competitiveness of a company depends largely on how deep its moat is. Companies with deeper moats have larger competitive barriers, less competitive pressure, and are more likely to become evergreen trees in the industry.

While ASML's moat may mainly come from its leading technological advantages. Let's first explain the technology of lithography machines - lithography technology is primarily classified by light sources, among which EUV (extreme ultraviolet light source) is currently the most advanced lithography machine that can be used in the advanced semiconductor chip process below 7nm, while DUV (deep ultraviolet light source) is a relatively mature lithography machine that can be used in semiconductor process technology of 7nm and above.

We know that the lower the chip process, the more advanced the technology. At present, the most advanced EUV lithography machine, which ASML commercialized and mass-produced around 2018, is still unique in the world. ASML has thus gained a monopolistic position and a very high market share due to its leading technological advantage.

According to Khaveen's data, in 2022, ASML held a 82.9% market share in the entire lithography machine market, and in the area of the most advanced EUV lithography machine, since it is the only one, its market share is 100%.

So can ASML continue the moat brought by its technological advantage in the future? In addition to observing changes in the competitive landscape of the lithography machine market, we can also focus on two indicators in terms of performance.

The first indicator is the research and development (R&D) expense ratio. ASML's R&D expense ratio has been around 15% in recent years, which means that for every 100 dollars received, 15 dollars are invested in R&D, showing a relatively high level of R&D effort. From the R&D expense ratio, it can also be seen that ASML is continuously investing significantly in R&D, which is key to maintaining its technological lead.

The second indicator is gross margin. The gross margin to some extent reflects a company's competitive advantage in the industry. The stronger a company's competitive advantage, the stronger its bargaining power with customers, and the higher its gross margin. In the last three fiscal years and the Q1-Q2 of 2024, ASML's gross margin has been above 50%, surpassing the previous 45% gross margin of the preceding years, reaching a new level. The trend of ASML's gross margin may indicate that its competitive advantage and moat are relatively stable so far.

For future performance, we can continue to observe ASML's research and development expense ratio and gross margin indicators, as they to some extent reflect ASML's determination to maintain technological leadership and the dividends it enjoys from its technological superiority.

3. Cash Flow and Shareholder Returns

As the upstream equipment manufacturer in the chip industry, Asml Holding, unlike TSMC, the foundry company, needs to continuously update capacity and equipment according to the development of chip process technology, and its cash flow situation is relatively healthier. Since 2013, Asml Holding's capital expenditure on purchasing properties, factories, and equipment has been approximately 8.24 billion euros, accounting for less than a quarter of the total net income. During this period, Asml Holding's free cash flow reached 34.75 billion euros, which is basically equal to net income.

With ample cash flow, Asml Holding also has the ability to carry out significant shareholder returns. In the US stock market, many listed companies reward shareholders through dividends and buybacks. Among them, dividends are the most direct way to reward shareholders, while buybacks can increase the company's return on net assets and earnings per share, inject additional liquidity into the market, which can be described as a multiple gain and is highly welcomed by shareholders.

Since 2013, Asml Holding's total dividends and net repurchases amount to 29.39 billion euros, accounting for approximately 83% of the total net income during the same period, which can be considered quite generous. For future performance, we can continue to observe whether Asml Holding can sustain its historical solid performance in terms of cash flow and shareholder returns.

Seeing this, you may have some new insights on how to read Asml Holding's financial reports. It is worth mentioning that each time a star company releases its financial report, it may represent a rare trading opportunity for different types of investors.

For example, if investors interpret the past financial reports and combine them with the latest developments, and believe that a company's latest financial report will release some positive signals and be bullish for the short term stock price, investors may consider buying the underlying stocks, or consider buying call options, and so on.

Conversely, if investors believe that a company's latest financial report will not be optimistic and will put pressure on the short-term stock price, investors may consider short selling. The method of short selling can involve short selling stocks, or considering buying put options, and so on.

Of course, if investors find that the direction of a company's financial report is unclear, but the stock price may experience significant upward or downward fluctuations after the report is released, then investors may consider buying its volatility, considering a straddle strategy of simultaneously buying call and put options to seize potential opportunities.

In conclusion,

When reading the financial reports of ASML Holding, it is important to focus on its performance growth, competitive barriers, cash flow, and shareholder returns.

In terms of performance growth, ASML Holding has both growth and cyclicality, and the change in its revenue growth rate and industry inventory turnover rate can help grasp its cyclical pace.

Regarding competitive barriers, ASML Holding's technological leadership advantage is crucial to ensuring high market share and competitive barriers; high R&D expenditure is key to expanding technological leadership advantage, while a higher level of gross margin is an important manifestation of competitive advantage.

In terms of cash flow and shareholder returns, ASML Holding has historically had sufficient cash flow and generous shareholder feedback. We can observe whether it can continue its solid performance into the future.

Every time the company releases financial reports, it may bring potential trading opportunities. Investors can consider suitable trading instruments based on their risk tolerance.